Explaining economic moats to an 8-year-old

Explaining ROIC, WACC and the five sources of a moat

Matthew Coffina 7 February, 2014 | 7:00PM

A company with a very profitable business is like a castle that is constantly under attack by competitors. Without a strong defense, competitors will soon imitate the company's products, charge lower prices, steal market share and erode profit margins to the point where the business is merely average, at best.

Economic moats -- a term Morningstar borrowed from Warren Buffett -- are what keep competitors at bay. An economic moat is a sustainable competitive advantage that allows a company to earn excess returns on capital for a long period of time. Morningstar analysts assign every company in our coverage universe an economic moat rating: either wide, narrow or none.

Starting with the basics: a lemonade stand

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About Author

Matthew Coffina

Matthew Coffina  Matt Coffina, CFA, is a portfolio manager for Morningstar’s Investment Management group and editor of Morningstar® StockInvestorSM.

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